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COMMODITY FUTURES FORECAST
WEEKLY REPORT
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Commodity Futures Forecast
Silver And Gold Diverge
Precious metals traders are confused. How is it possible for gold to make new 12-year lows while silver soars to yearly highs? Most traders believe these metals have moved in tandem for almost the full century. The fundamentals impacting gold should surely spill over to silver. Or, the demand for silver should support gold. The significant divergence between these seemingly related commodities has been astounding.
I, too, have fallen victim to the traditional viewpoint that silver and gold are somewhat related. Further, my interpretation of silver fundamentals leads me to believe that silver should collapse with as much vigor as its yellow brother. Last night's session saw silver touch 62200 before retracing back to open this morning at 59700. This hints that a top could be near. Of course, I believed this last week!
Very little has changed for silver over the past several months. While there are rumors of a “big money” squeeze, this strategy would be extremely dangerous when considering how quickly suppliers can flood the market. Silver is particularly vulnerable because demand has been static and film sales are flat. As the consumer sector expands, the industrial sector is moving away from film. X-ray, lithography, and even media are rapidly converting to digital. Since industrial categories like x-ray and lithography use high saturation/high content black and white negatives, any deterioration in this consumption can easily exceed consumer photography. The Silver Institute argues that expanding global wealth correlates with more snap shots. But, the digital trend is too great to overcome by the consumer trend...if, in fact, the trend is real.
This morning's collapse in platinum leaves silver as the lonely bull. (With the exception of palladium which has completely different fundamentals for now.) Of course, I am writing in the morning and much can happen by the afternoon! Since copper has been unable to recover, the prospective 1998 trend should be more copper sales and increasing production. This means silver supplies should expand by the second quarter.
Although we took back-to-back hits in our attempts to sell silver short, I am inclined to explore this trade again. If silver comes under pressure, it could drop like a stone brick. Since the strength is hard to explain, options may provide a more conservative approach to a short strategy. March is the next delivery, so we will pay for time value. I would not be surprised to see silver test below $4 if it decides to track gold. With Asia still in the economic dumps, don't anticipate a surge in base metal demand within the next six months. Any “bailout” by the International Monetary Fund (IMF) will take at least a year to work through the system.
Grains Have Late Seasonal
Usually, grains respond lower during the harvest and weakness carries through the December delivery. Thereafter, the seasonal pattern picks up on southern hemisphere production and U.S./Canadian exports. As I mentioned in previous Reports, global crops are in better shape than we might expect from a “most severe” El Nino episode. This week, satellite surveys revealed a pronounced abatement in the warm tide which could signal an abrupt end to the phenomenon.
This is not necessarily good weather news. First, El Nino is frequently followed by La Nina...an opposite effect that can swing weather patterns toward drought in the northern growing regions and floods in the southern hemisphere. It is too early to tell if we will see the shift, but the speed of the cooling has raised some concern. Certainly, it is too early to tell if patterns are about to be influenced. This is always the case. If we knew for sure, we would all be retired!
I am still favoring the short side. There is an indication we are approaching “reference lows” that provide an historical basis for assuming bottoms. This is particularly true for corn and wheat. Soybeans, on the other hand, have a reasonable downside distance to trace before reaching supports. With South America and Australia skirting weather problems (for now), their harvests are looking better. The news about lower Pacific Rim demand for U.S. grain and meats adds to the negative picture.
I want to track beans to approximately $6.50. The reference price is actually near $6.20, but we are still early in the southern hemisphere season. In the meantime, we must watch for the freeze/thaw cycle when evaluating winter wheat over the next several months. As we move into January and February, there is a propensity for wide temperature swings during an El Nino year. This can damage roots and diminish winter wheat yields. If this appears, I will move back into the bull spreads.
Energy
Our crude oil analysis has proven correct. Inventories are holding and the Iraqi oil deal is actually expanding rather than contracting. There are some obvious political maneuvers going on in the Middle East that we will hear about after deals are done. We are forced to track these developments technically.
My assessment still points to a possible bust below $18 and a test in the low $17 area. If 1720 is taken out, we will see more quota cheating and a challenge below $17. I am disappointed that we were stopped out of our short gasoline for a break-even. Clearly, the energy complex, in general, is under pressure. Moderate temperatures across most of the country have held heating oil and natural gas consumption in check.
We lowered February crude oil stops to 1950, having made our 1845 objective. As of today, we are testing our 1823 objective which moves the stop to 1911. This is a real keeper!
December 11, 1997Philip Gotthelf
Commodity Futures Forecast
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